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By Isaac Peck, Editor
Does USPAP still work? 30 years after its creation, many in the appraisal industry are questioning the efficacy of the appraiser’s rulebook. Many argue the one-size-fits-all approach unnecessarily restricts appraisers, creating inefficiencies that cost them business.
The Uniform Standards of Professional Appraisal Practice (USPAP) has been the standard of the real estate appraisal profession for 30 years. Established in 1986–87 through a joint committee of U.S. and Canadian appraisal organizations, the copyright to USPAP was donated to the Appraisal Foundation (TAF) in 1987.
In 1989, the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA) authorized TAF as the source of appraisal standards and qualifications, while simultaneously requiring the states, under supervision from the Appraisal Subcommittee (ASC), to license, regulate, and supervise appraisers. The states are also tasked with enforcing USPAP on all appraisals for federally related transactions.
Many states apply this mandate to all valuation activity performed by appraisers, requiring that appraisers follow USPAP when reporting and developing any opinion of value, not just value opinions for federally related transactions. Thus, USPAP is the law of the land and a universal standard for nearly all Licensed or Certified real estate appraisers in the United States.
The debate over USPAP centers around two key practice areas; the first involves non-lender appraisal work. If an appraiser is approached by a private client and asked to produce a valuation according to standards other than USPAP, should the appraiser be allowed to deviate from USPAP? The second area is directly related to bank/lender work and whether an appraiser should be able to provide an “evaluation” or a valuation product that is considered less than an appraisal. Should this product have to comply with USPAP?
While the advocates for a USPAP alternative contend that loosening USPAP’s requirements will allow for a transformation of the appraisal profession and is necessary to ensure its health and growth, opponents argue such moves will diminish appraising and erode the public trust, ultimately hastening the demise of the appraisal profession.
Advocates argue that allowing appraisers to deviate from USPAP will provide appraisers relief from what some refer to as “USPAP handcuffs,” while also incentivizing people to join the industry.
Chief among these advocates is the Appraisal Institute (AI). Ever since 2013, AI has been promoting its own Standards of Valuation Practice (SVP), an alternative set of valuation standards that it says will create additional business opportunities for appraisers by allowing increased flexibility in non-lender assignments.
Jim Amorin, MAI, SRA, AI-GRS and 2017 President of AI, says that AI is not looking to supplant or replace USPAP for federally related transactions, but that requiring appraisers to comply with USPAP for all appraisal work is causing appraisers to miss out on a number of opportunities to diversify their businesses and apply their valuation expertise in the marketplace.
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In terms of applying other alternative valuation standards for non-federally related transactions, Amorin says there are a number of viable alternatives that state appraisal boards should consider. “There are many different standards out in the marketplace, including USPAP, Canadian USPAP, the International Valuation Standards, AI’s SVP, and more,” said Amorin. “What if a client does not need or want USPAP as the guiding document?”
Amorin says he recently encountered this problem himself. “A few months ago, I was contacted by a family-owned Canadian firm which owns assets throughout the U.S. and Canada. They were seeking an internal valuation of their assets and wanted me to appraise several properties in Texas. However, they needed the valuations to conform with Canadian USPAP (CUSPAP),” says Amorin.
This created an obstacle for Amorin. “When I told them that because the properties are located in Texas, I would have to comply with USPAP as well, they said: ‘That’s not what we want, we don’t want to train our Board of directors on USPAP.’ I then proposed that I could comply with USPAP by just including additional information in the addenda to the report, but they told me very clearly that they didn’t want any references to USPAP in the assignment, just CUSPAP. It came down to a business decision on my end and I ultimately declined the assignment,” reports Amorin.
These types of scenarios are encountered by appraisers throughout the U.S., many of whom are in “mandatory reporting” states where, as Licensed/Certified appraisers, they are not permitted to produce any valuations that deviate from USPAP, according to Amorin. “If the state of Texas would allow standards other than USPAP, I could have performed the appraisals reliably, impartiality, and competently—the way that I’m supposed to. Nobody would have been harmed by that. I would have given the clients exactly what they were looking for,” argues Amorin.
Another example provided by Amorin is right of way and eminent domain appraisal work, which his firm specializes in. “It is not uncommon for a local government agency to come to us and say: ‘We’re thinking about pursuing a right of way case for a new sewer line across this ten mile stretch of properties. For budgeting purposes, we need an idea of what the acquisition costs are going to be.’ For an appraiser following USPAP, we have to do an appraisal on every one of those properties,” Amorin said. “While that’s great work for an appraiser, the city has to spend a lot of money up front, just to make a quick decision on what their budget should be. It would be very nice if an appraiser could provide this service. But USPAP makes this type of assignment incredibly difficult and very cost prohibitive. So while an appraiser is best positioned for this type of work, oftentimes the agency ends up going to a local real estate brokerage and asking them to come up with an estimate,” says Amorin.
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This is the driving force behind AI’s effort to promulgate its own set of standards, SVP. “We are trying to get states to open up their rulemaking processes to allow state appraisal boards the opportunity to study alternative standards and approve them for use for non-federally related transactions. This will allow appraisers to engage in more kinds of work, while making sure they are still providing independent and objective valuations performed with the highest ethical standards,” Amorin says.
AI is actively pursuing legislative changes in a number of states. “The Texas Appraisal Board can now open up a rulemaking process to begin evaluating other valuation standards. We are pursuing similar language in Florida and California as well. After a set of public hearings and input from interested parties, state boards would have to review a proposed set of standards and determine if they are appropriate for appraisers in the state,” says Amorin.
In response to critics who believe that AI’s efforts are dangerous and bad for the profession, Amorin says nothing could be further from the truth. “I think it is a scare tactic used by a handful of people who are opposed to change. We are not asking for the Wild West. Any additional standards would still need to be approved by the state appraisal board on a case-by-case basis. This will ensure appraisals are done competently. USPAP has become very rules based and mortgage centric. There are a lot of different types of work for appraisers besides lending work. Some of the rules create an unnecessary burden, and allowing state boards to review and approve other standards will help the profession,” argues Amorin.
Case for “Evaluations”
Associated with the movement to set aside USPAP for certain alternative products is what are often referred to as evaluations. Evaluations are described as an “appraisal-lite” and are defined by the 2010 Interagency Guidelines as “A valuation permitted by the Agencies’ appraisal regulations for transactions that qualify for the appraisal threshold exemption, business loan exemption, or subsequent transaction exemption.”
In other words, an evaluation is used when an appraisal is not required.
Proponents of evaluations argue that requiring appraisers to follow USPAP in every instance makes it cost prohibitive to compete in this space and prevents appraisers from most evaluation work, which some estimate as being three to four times the annual volume of appraisal work.
Under USPAP, the minimum an appraiser can prepare is a Restricted Use Appraisal Report but these are still appraisals, not an evaluation.
Most states are “mandatory reporting” states, where an appraiser must follow USPAP when doing any valuation work. Some, however, have given appraisers the greenlight to capture this work. Currently, appraisers are exempt from following USPAP when performing evaluations in North Carolina, Georgia, and Tennessee.
Even when it is codified in state law, however, some appraisal boards have openly resisted USPAP exemptions for evaluations. A Virginia law took effect July 2017 aimed at allowing appraisers to perform evaluations without complying with USPAP. But the Virginia Real Estate Appraiser Board immediately issued a “Guidance Document” stating that it still intends to enforce USPAP as a universal standard that appraisers must adhere to when performing both appraisals and evaluations. It remains to be seen how this conflict between state law and the appraisal board’s guidance will be resolved.
Because AI’s alternative SVP (Standards of Valuation Practice) is primarily focused on non-bank work, Amorin says that the AI’s position on evaluations is distinct from its push for alternative standards. “Our work in the evaluation area is not to force the issue, but is centered on supporting the initiatives of our local chapters. We recognize there is more than one school of thought on this issue among our membership and appraisers at large, so we only actively pursue this initiative when and where our own members have asked for it. The most recent example is in Virginia. One of our local chapters in VA reached out and asked for help pushing through a piece of legislation, and we became involved on that basis,” says Amorin.
Amorin says allowing appraisers to perform evaluations will improve the valuation work being done in the space. “Evaluations have been around since before FIRREA and they currently make up 75% of the valuation work being done (not to mention automated valuations). That means three evaluations are performed for every one appraisal. This work is currently being provided by non-appraisers, including brokers, accountants, financial analysts, data providers, and even bank tellers. Who better to provide an evaluation than a competent and qualified real estate appraiser? I don’t think an evaluation is the right answer for every lending decision, but this is a huge market segment that appraisers are being frozen out of. And in cases where an evaluation is appropriate, an appraiser is the best person for the job,” says Amorin.
The Appraisal Foundation, which has frequently bumped heads with AI over the years, is adamantly opposed to any alternative standards to USPAP and argues that allowing state appraisal boards to approve alternative standards for use in non-federally related transactions will open the door for numerous domestic and foreign standards, allow contingent fee assignments without disclosure, encourage lax recordkeeping requirements, and lead to misleading or fraudulent appraisals. TAF’s position is that USPAP “provides tremendous flexibility for appraisers” and provides “consistency and stability” to the appraisal profession.
In Defense of USPAP
Jonathan Miller, President of Miller Samuel, Inc., longtime appraiser and outspoken advocate for the appraisal profession, argues that allowing appraisers to deviate from USPAP and provide evaluations and other non-USPAP compliant valuation products ultimately erodes the public’s trust in the appraisal profession and threatens the longevity of the industry.
Miller agrees that banks and lenders have used evaluations, and even automated valuation models, since the 1990s, but he sees this latest push for appraisers to depart from USPAP as a slippery slope. “A high level of public trust is what keeps the appraisal industry in business. It holds our profession to a higher standard. If you allow appraisers to begin performing evaluations and deviating from USPAP, you will have trained appraisers being no more highly regarded than others, such as real estate agents and bank tellers,” says Miller.
“We need to think beyond the short term income opportunities of allowing appraisers to compete in the evaluation market,” says Miller. “It is more about the longevity and relevance of the appraisal industry and less about appraisers getting evaluation fees tomorrow.”
Miller agrees that appraisers are the most qualified professionals to perform evaluations, but says that misses the point. “Advocates for a USPAP alternative seem to be saying that an appraisal and evaluation are the same thing because they both conclude in a value, and who better qualified to do something less than an appraisal than an appraiser? Of course that’s true. But if we lower our standards, eventually our appraisal skills will be worth no more than any other member of the public. Practitioners like doctors and electricians have the public trust that their service quality will reflect their training. In reality, you either are an appraiser or you are not. We don’t have the luxury to switch that on and off,” Miller says.
Even outside the evaluation issue, Miller argues against any alternative standards for many of the same reasons, contending that the main problem is confusion among the public, and even confusion among the valuation profession on what it means to be an appraiser.
It could also be a regulation nightmare, Miller argues. “We have 55 states and territories. What will happen if each state starts individually approving or denying separate valuation standards? If we accept the AI’s SVP, what about the American Society of Appraisers’ (ASA) standards, and all of the other appraiser associations? Maybe Canadian USPAP will be allowed in Alabama but not in Florida. This creates another layer of confusion and completely blurs the lines about the standards that appraisers are held to. It’s the worst thing you can do to the consumer and ultimately it dilutes what it means to be an appraiser. It is damaging the bedrock of what separates us from a broker giving a BPO,” argues Miller.
George Mann, former Chief appraiser for Fifth Third Bank, is a long-time advocate for allowing appraisers to perform non-USPAP compliant evaluations and shares his thoughts from a lender’s perspective. “I have been a ‘client’ for evaluation and appraisal services for over 25 years. Since 1990, banks have been ordering evaluations and are going to keep ordering them. From a bank’s perspective, we would love to use the most qualified people (i.e. licensed appraisers) to perform evaluations, but unlike federal law that says we can, almost all state laws say we can’t,” says Mann.
All that is being asked is for state law to agree with existing federal law, Mann says. “Federal Law has said since 1990 that appraisers should have the choice to perform non-USPAP Evaluations. All that is being asked is that appraisers be able to perform a service they are best positioned to provide,” argues Mann.
Answering critics who say the public trust will be damaged, Mann says the argument does not hold water. “Right now in 47 states the public has to rely on non-appraiser evaluations provided by their banks. So, how can public trust not improve by allowing the most qualified people do them? It cannot go down by allowing this. It can only go up,” argues Mann.
Mann offers a comparison between appraisers and accountants. “Imagine there is a federal law that says that all Certified Public Accountants (CPAs) must follow Generally Accepted Accounting Principles (GAAP) for certain assignments. (GAAP is only required for public company financial reporting.) But then state laws take it further mandating that all personal tax returns prepared by CPAs must also follow GAAP. Well, the public isn’t going to pay extra for CPAs to do their tax returns when GAAP is not needed for this type of work. The public will either do their taxes themselves or find bookkeepers who aren’t licensed accountants or CPAs and aren’t required to use GAAP. Where is the benefit to anyone with such state laws? It would prevent accountants from providing a service that they are most qualified for. I couldn’t hire an accountant to do my tax returns without them being required to follow GAAP. That is where we stand with evaluations and USPAP. It only hurts appraisers and hurts the public,” says Mann.
Given that evaluations are a “fact of life,” according the Mann, the question is: do appraisers want to do that type of work? “I would rather not dictate to the small future generation of appraisers what services they can or cannot provide – especially in regard to one they have been legally allowed to provide by federal law for 27 years! Appraisers have lost out on this work for 27 years! The banks and those doing evaluations don’t care if appraisers choose to lose out on it forever. Non-USPAP evaluations will always be done. So do the most qualified people want to be part of that or not?”
With Virginia recently passing legislation allowing appraisers to complete evaluations, and the Texas Appraisal Board now empowered to consider and approve alternative appraisal standards, the question arises: where will the industry go from here? Kansas, North Carolina and Florida are currently considering bills that will allow appraisers to perform evaluations, with the Kansas legislation also potentially allowing use of AI’s SVP when “performing an appraisal for any purpose other than a real estate-related financial transaction.” California is again considering a bill allowing appraisers to perform non-USPAP compliant valuations, after the first draft of the bill was stuck in committee and failed to pass in 2015.
The debate over what standards appraisers should be held to and what types of “value opinions” they are allowed to provide is certain to continue, as appraisers and industry stakeholders grapple with what the future of the appraisal profession should look like.
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About the Author
Isaac Peck is the Editor of Working RE magazine and the Director of Marketing at OREP, a leading provider of E&O insurance for home inspectors, appraisers, and other real estate professionals in all 50 states and D.C. He received his master’s degree in accounting at San Diego State University. He can be contacted at firstname.lastname@example.org or (888) 347-5273.
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